Dollar Faces Worst Weekly Loss Since June Amid US Policy Uncertainty

The Bloomberg Dollar Spot Index fell to a three-week low on Friday, marking its worst weekly performance since June as unpredictable U.S. policymaking weighed on the currency ahead of the Federal Reserve meeting next week. The index is down 0.8% over five days, with options traders now hedging against further dollar losses, reversing bullish sentiment from just a week ago. This week's volatility was driven by U.S. President Donald Trump's fluctuating trade policies, including his initial threat of tariffs on Europe and subsequent deal with NATO Secretary General Mark Rutte at the Davos summit. Despite rising U.S. Treasury yields, suggesting a resilient economy and potential Fed inaction, political risks appear to be overshadowing monetary policy concerns. Traders anticipate two quarter-point interest rate cuts this year, with little chance of a move next week. One-week volatility, reflecting the Jan. 28 Fed decision, hit its highest level in over a month. Meanwhile, U.S. unemployment claims remained steady at 200,000 last week, supporting moderate labor market optimism. "Political event risks are skewing net dollar bearish over the next few weeks," said JPMorgan FX strategist Pat Locke. With Trump reportedly nearing a decision on the next Fed chair, attention may shift to central bank leadership changes.